Effects of Exchange Rate on Foreign Direct Investment Inflow in Nigeria

Aims: This study examined the place of exchange rate in determining foreign direct investment inflow into the Nigerian economy using time series data from 1980 to 2017.

Study Design: Historical research design method was adopted for the study, it uses secondary sources and a variety of primary documentary evidence.

Place and Duration of Study: Department of economics, faculty of social sciences, Nnamdi Azikiwe University, between September 2010 and May 2018.

Methodology: The method adopted for this study was the Autoregressive Distributed Lag (ARDL) estimation approach and error correction mechanism within the framework of dynamic OLS (DOLS) estimation. The analysis began with a verification of the unit root properties of the variables. The Augmented Dickey Fuller (ADF) and Philips-Perron (PP) unit root procedures were employed and both tests indicate that the variables were integrated of either order I(0) or order I(1). This warranted the use of Bounds testing approach in determining the cointegration among the variables in the various equations in the selected countries. Analysis using the Bounds testing approach to cointegration confirmed the existence of long run relation among the variables of the models. In determining the impact of exchange rate on foreign direct investment inflow in Nigeria, we estimated an ARDL model.

Results: The results indicate that exchange rate affects FDI in both the long and short run. The result also reveals that the impact of exchange rate on FDI in the short run continuous up to three periods after the initial disturbance.

Conclusion: This study concluded that exchange rate appreciation will lead to increases in foreign direct investment inflow. The study therefore recommended, amongst others, that government should apply exchange rate regime that is competitive at the international market so as to attract more FDI inflow to the Nigeria economy.